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Monday, 19 February 2018

Are the rain clouds of US NPE litigation gatheringover Europe and will Brussels act?

Does Europe have a patent troll problem? It depends on who you ask and if you think trolls, non-practicing entities (NPEs) or patent assertion entities (PAEs), or whatever you call them and however you define them, are a "problem". No matter what side of the fence you happen to be on, there has not been any empirical evidence to prove or disprove that notion. Anecdotal evidence has mostly been relied on, but unless you are running a political campaign in 2016, anecdotal evidence can only take you so far. That is about to change...

The AmeriKat is in Brussels this evening for the launch of a new study by Darts-IP at the European Parliament which investigates and analyzes the prevalence and trends of patent litigation by NPEs (the term deployed by the study, see below) in courts across Europe and at the European Patent Office (EPO).

Ever since the proposals about the Unified Patent Court (UPC) really started to solidify in 2012, the potential inclination of some European patent judges in some jurisdictions to grant automatic injunctions was flagged as concern. Without the ability to rely on the safeguard of eBay v MercExchange(i.e, no rule for an automatic injunction for patent infringement), there was worry from certain sectors that the granting of automatic permanent injunctions in the UPC would create a playground for NPEs. The harm being that, with the grant of an automatic injunction, the NPE would have considerable leverage to extract extremely high damages and licence fee rates – despite the NPE not even having a market for which an injunction would have been necessary to protect. With the US patent litigation environment becoming more hostile to NPEs, the concern expanded from just UPC-centric issues to the current landscape of classical patent litigation in national courts across Europe. There was thus a call to re-focus and re-emphasize the principle of proportionality and the specific circumstances of a case when tailoring remedies in patent cases, as set out in Recital 7 and Article 3 of the IP Enforcement Directive. This was to try and push Europe towards a more eBay environment when granting injunctions. The European Commission's IP Package published on 29 November 2017 reaffirmed the proportionality principles, but groups like IP2Innovate (see below) wanted to see more development, such as ensuring that the proportionality principle and other safeguards applied to all patents, not just standard essential patents (SEPs).

So are the concerns about Europe becoming the new patent troll playground rooted in reality? It seems so…and there seems to be an American invasion.

Annual growth rate of NPE patent infringement in Europe

Pooling data from their database of 3 million cases and focusing on actions commenced between 1 January 2007 and 31 December 2017, the study (link here) has found as follows:

19% - average annual growth rate of NPE patent infringement in Europe. In 2012, there were 75 NPE actions. In 2016, there were 169 actions. 2017 is estimated to break the record for NPE related cases at 173 (although data is not complete).

60% - the proportion of cases which originate from NPE entities based in the US since 2013.

According to the report on page 6, the top 5 most active entities are Intellectual Ventures (19.18%), Marathon Patent Group (14.29%), Acacia Research Group (10.20%), Unwired Planet (8.98%) and FORM Holdings (8.16%).

80% - the proportion of NPE litigation faced by the top 4 most sued companies in Europe (Vodafone, ZTE, Huawei and Deutsche Telekom), as compared to their non-NPE European patent litigation (see page 7).

23% - the proportion of SMEs who are sued by NPEs. Most companies (77%) sued by NPEs in Europe are large enterprises.

The steeper increase of NPE litigation in the US corresponds to recent legal changes in the US.

Germany - the hotbed of NPE litigation which accounts for 20% of their patent actions. Italy takes second place with 6%, the Netherlands at 5% and the UK and France at 4% each. Germany appears to be favored because of the bifurcated system with faster infringement courts than validity courts and a relatively high infringement win-rate for NPE plaintiffs.

NPEs litigating in Europe comes at a risk. An NPE’s patents are more often successfully invalidated than patents asserted or owned by non-NPEs.

52% - the likelihood of an NPE in Germany and the UK winning on infringement. The rest of the EU has an infringement win rate of 23% (although there is much less NPE litigation in those jurisdictions, so the data pool is not there to be terribly meaningful). Weirdly, for non-NPE litigation the infringement win rate in Germany is 66%, but in the UK it is less than NPE litigation at 41%. However, validity tells a different story...

60-65% - the validity loss rate for NPEs in Germany and the UK, compared to 44-45% for non-NPE litigation.

However, the data is imperfect. This is only data held by Darts-IP and in many countries information about issued cases which settle early is impossible to maintain. Data and scrutiny of data is important. The lack of fulsome data from EU Member States' courts is important not just for this study but for analysis of all substantive and procedural IP subsistence, validity, protection and enforcement. As it is in the business of sharing IP decisions from across the world, the IPKat has been banging this drum for near 15 years now - the EU must make it a priority to ensure that all Member States court information and decisions relating to IP are made easily accessible by the public (subject to confidentiality restrictions of course). It is noted that this issue was/is being looked at by the Commission as part of their IP Enforcement consultation.

MEP Delvaux (Luxembourg)

Swedish MEP, Max Andersson stated that the study was “just the tip of the iceberg”. Echoing the IPKat's sentiments he called for more “transparency and more complete data” which he says are needed to find solutions to what he called “the problem of abusive patent litigation”.

MEP Mady Delvaux from Luxembourg was concerned that artificial intelligence (AI), the internet of things (IoT) and the digital economy was being put at risk:

“In order to prevent abuses, we need to make sure that Europe’s patent legal system operates effectively for both litigants and society and supports digital innovation in Europe.”

The AmeriKat expects that there will be comments about the use of the term NPE and how a company is classified as an NPE. The use of the word “troll” is emotive and often unhelpful, so the terms NPE and PAE are used instead. However, classifying whether a company is a NPE and/or a PAE is increasingly difficult as companies transform the ways in which they commercialize their R&D and IP portfolios (i.e. selling products, withdrawing from markets, licensing their IP or a mixture). Darts-IP considers NPEs to be “independent organizations which own or benefit from patent rights but do not sell or manufacture goods or services associated with them (i.e. non-operating companies) and which have an active (offensive) assertion or litigation role as plaintiffs towards the enforcement of their patent rights).” Darts-IP states that the focus is on “assertion-focused NPEs” and that the definition takes into account the flexible nature of a company’s business. Still, the assessment is always qualitative to some respect.

IP2Innovate, a group of 65 companies (including corporate members that include Google, Spotify and Intel) that create innovative products in Europe, issued this press release in response to the study. Kevin Prey, Chairman, stated that the study confirmed what they had all expected about the rise of PAE activity in Europe. He called on the European Commission and Member States to

“to move quickly to provide investors and innovators with greater protections, particularly in terms of increased transparency and litigation data. The patent system must support, not hinder, innovation and growth.”

However, the study does not examine the impact of the rise of NPEs/PAEs in Europe, just the frequency of litigation, in which courts and the chances of an infringement and validity success. On a case-by-case basis, patent litigators may well be able to see the commercial impact of NPE litigation, but there needs to be more exploration of and evidence on the economic impact of such activity on Europe’s innovation economy. The longer countries and the legislators wait to act of course the more difficult it will be to change the landscape in the future. But pending that next stage of analysis, it seems clear based on the evidence so far that US NPE patent litigation has crossed the Atlantic to our European shores. Whether history repeats itself is up to the parties, legislators and judges…

7 comments:

Proof of the pudding
said...

This certainly lends weight to the concerns voiced (repeatedly) about possible, negative impacts of the UPC.

It is no surprise that bifurcation in Germany attracts NPE litigants, and that the costs of litigation in the UK (as well as the absence of bifurcation) is off-putting for all but the most confident / determined of NPEs. However, the confirmation that these factors do indeed influence the behaviours of litigants ought to prompt some serious consideration of what behaviours we can expect the UPC to induce in NPE litigants.

My own view is that there are a number of important factors that will almost certainly influence behaviour. These include: the (relatively) low cost of bringing infringement cases at the UPC; the absurdly high cost of raising a defence of invalidity at the UPC; the opportunities for "forum-shopping", particularly the selection of fora that are inconvenient for defendants; and the opportunities for "gaming" the system with regard to withdrawal of opt-outs (and consequent changes to the law(s) of infringement that will be applied by the court).

All of these factors point to the UPC becoming a paradise for NPE litigants. Is this really what we want for Europe?

I am sceptical about considering the background of a patentee. To use an analogy from real estate: should it really matter who the owner of a piece of land is when he decides to take action against someone constructing buildings without a permit on his land? A title to a piece of land is a title to a piece of land whether you like it or not.

"A title to a piece of land is a title to a piece of land whether you like it or not."

Sure, but consider this.

If someone is living on that land, and then someone moves in next door and plays loud music every evening (and thereby disrupting the landowner's quiet enjoyment of the property next door), then the damage being caused is much greater here than the alternative where no one is living on the land.

New plots of land cannot be created "at will" by those seeking land. And they most certainly not be created within an existing plot that has a different owner.

Another point is that, for land, there is no official authority that decides whether or not title to the land will be granted, and how big the plot will be.

The latter topic reminds me that there is yet another factor that could drive "antisocial" behaviour in Europe from NPE litigants. That is, if the granting authority does not do its job properly (ie grant new titles inappropriately) then this will encourage abusive litigation based upon invalid rights.

Such abusive litigation has many characteristics in common with protection rackets run by gangsters: "That's a nice market for your product that you've got going there. It would be a real shame if something nasty happened to it, like a court injunction."

With high costs for launching a defence and no absolute guarantee of a high-quality (ie correct) court decision, how many of those threatened with such abusive litigation do you think would be inclined to pay the litigants to make the issue go away?

It is at least a little reassuring to see that "big" companies have so far been the main targets of NPE litigation in Europe, as they should at least have the option of fighting back (hard) against any "gangsters". However, if pan-European litigation is made that much cheaper, and the costs for raising an invalidity defence are made that much more expensive, then it is a no-brainer that NPE litigants will inevitably turn their attention to less lucrative but far "softer" targets ... such as SMEs.

With the EPO seemingly granting more and more (clearly) invalid patents, and with the current UPC set-up being such a favourable forum for NPE litigants, it is clear what will be in store for us if and when the UPC as currently envisaged ever sees the light of day. I repeat: is this really what we want for Europe?

The noise factor (nuisance) does not have a ready analogy to patent law, and is quite inapposite to the point being made that the owner of a property right does not affect WHAT the property right entails one to do.

In the US, this aspect is even more central to our Sovereign's choices in constructing the patent system.

There are many companies producing products that have patents that do not protect one of their own products but which are leveraged against others for financial gain. In other words, they are acting in exactly the same way as NPEs.

There's a real danger in defining NPEs in a particular way that leads to an unbalanced system of patent enforcement - why should Pfizer, for example, be allowed to assert a patent whilst someone else would not be allowed to enforce that very same patent simply because they have been defined as a NPE?

Who should be the one making the decision that any particular party is a NPE or not and on what basis?

Patent rights are property rights and one party should not have those rights restricted or taken away simply because they are defined as a NPE.

I looked at the Darts report and I'm not sure that they have complete data from the past. I have asked them if they have all the Nokia IPCom cases in there. I suspect not (in particular I think they have missed all the Italian cases and quite a few German cases). If they don't have them, then the main finding of the report (that there has been an increase in NPE litigation in Europe over time) might not hold up. It may just be that the increase that Darts is seeing is just a result of the fact that Darts is getting better at tracking NPE cases in Europe.

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